After three lower days for the S&P which began last Friday because the VIX got much too low for any further rallies to continue, something that those market experts who say that the S&P is destined for new all-time highs do not realize will be so easy if the VIX stays close to 10, the market finally took out a measure of revenge on those who insist that problems in the island nation in the Mediterranean, otherwise known as Cyprus that is basically a tax haven for wealthy Russians, is going to extract its own negative revenge on our stock market.
The Dow began with a 90 point gain by 10:20am to 14,545, which had the honor of now being the best-ever level that it had ever achieved and then fell back to an advance of only 38 at its worst intraday level just at the time of the 2pm release of the latest F.O.M.C. interest rate statement. It then proceeded to advance to what will now be the new benchmark for it to be overtaken on the upside at a 91 point gain to 14,546 at 2:25pm, before the Bernanke press conference, and finally closed with a 56 point advance.
Breadth numbers were at a 2 to 1 upside ratio and the VIX really took out its revenge on those who had bid it higher on the first two days of the week as it made a huge decline relative to the advances of the major averages, and this was strictly a function of the settlement of the March options series, as there was the obvious attempt to knock out the 13 and 14 call buyers, who had bought so many of these on Tuesday that the volume was pushed to the largest ever, and as they say at Christmas, these buyers ended up with coal in their stockings, or more exactly in their wallets this time. It ended with a large decline down to 12.67, a loss of 1.72 relative to that 56 point Dow advance, once again sort of equalizing out the process of its larger than normal gains during the first two days of the week.
Regardless of these shenanigans, once again the VIX is theoretically allowing the market to move higher as the last time it closed at these levels was on March 8th, at which time the S&P was 1551 versus yesterday’s close of 1559, so here we go again on this.
The yield on the10-year Treasury note rose back up a bit after having declined to as low as 1.90% on the supposed flight-to safety panic on the Cyprus news from earlier in the week and even the recently battered Euro rose a bit from the beating it had also taken on this news as well. This helped crude oil to rally somewhat but gold took the day off after its most recent advances.
The one area of the market that did reach an all-time high on the close was the mid-cap indexes, while the Dow Transports, which have been the best performer this year, got pulled down by the weak report from FDX. Homebuilders did well on good earnings from LEN.
Since the main focus of attention, at least for one day, was the Fed, it was nice to see for a change that what they said and the press conference afterwards did not cause a market selloff like it usually does. They said that they will continue to move forward with their aggressive stimulus efforts but would take into accounts the potential risks posed by these policies at the same time re-iterating that they must still work to lower the unemployment rate.
They also pointed to better economic signs here in the U.S. but at the same time they deleted a reference from their last statement that global financial strains were easing, obviously a nod to what is going on in Cyprus. They referenced their ongoing commitment to current policies with the statement that “these costs remain manageable but will continue to be monitored and we will take them into appropriate account as we determine the size, pace and composition of our asset purchases.” They added that “when we see that the labor market situation has changed in a meaningful way, we may well adjust the pace of purchases.”
What this basically means is that they will keep their foot on the monetary pedal as long as inflation remains below 2.5% over a one to two-year time horizon and until the unemployment rate falls to 6.5%, and this policy of course has been one of the primary reasons for the market’s advance over the past four years.
It’s too bad that Chairman Bernanke did not hold his press conference today, as he made reference yesterday to the fact that the markets were higher, which was his way of saying that the fallout from Cyprus should not be “enormous”, to use his own words, because the market today got off on the wrong foot and has not been able to right it so far, as some weaker economic news from Europe (surprise, surprise) put a negative dent on the proceedings, with both a German purchasing managers’ index and an E.U. services and manufacturing index coming in lower than expectations, and what else is new in that part of the world?
The economic reports released here were on the whole better than expected, with the four-week moving average of weekly jobless claims declining to their lowest level since February 2008, February existing home sales rising to their highest level in three years and both the February L.E.I. and the March Philadelphia Fed Manufacturing Survey coming in better than expectations.
But now we are in the situation where market experts can point to “Cyprus” as the excuse for why the market will go lower on any given day, and today’s decline goes against the inevitability of most market experts who say that it is just a question of time before the S&P also breaks into new record territory. I have never seen markets accommodate what the consensus of “experts” is, and we might have to wait a little longer for the S&P to break above that 1565 all-time best ever level.
The Dow began the day with a loss of 60 points or so, then rallied back to what will be its best level of the session with a decline of only 21 at 11:45am before really taking it on the chin with a loss of 127 at its worst level of the day so far at 2:05pm, from which it point it is trying to stabilize and is lower by 110 as this is being written.
Breadth numbers are at a negative 10/19 ratio and the VIX is sort of behaving itself today as it trades in line with where it should be, and is currently ahead by 1.10 to 13.75. And naturally, there is the old flight to safety “risk-off” trade today as yield on the 10-year Treasury note is back down to 1.93% after rising yesterday and the Euros is back down again, to 1.29 on a report which said that the E.C.B. might not provide emergency funds after Monday unless the Cyprus banks restructure themselves, which of course would mean huge losses to depositors and of course to all of the Russian money that is stored in this tax haven.
The only good thing that is coming out of today’s session is that crude oil is declining once again on the weak news out of Europe while ignoring the better news here which might have made it rally on other days. And gold is once again moving higher on its latest role as the ultimate safe-haven, and let’s see how long this lasts.
The technology sector was already weakened ahead of the opening by a poor report last night from ORCL, which is dragging down other technology names that had done well lately, and IBM is the largest victim and its declines today are accounting for an astounding 35 points of Dow losses just by itself and even mighty (and when is the last time that this word was used to describe the shares of) HPQ is succumbing as well. On the other hand, the stock named after a fruit is giving us a nostalgic moment as it is acting the way it used to on down days in the market last year, rising for whatever reason as opposed to its 40% collapse for the past six months while some market averages were in the process of making new all-time highs, go figure.
We have been pointing out the question of whether or not the market is overvalued at its new highs for the Dow and close to new highs in the S&P. At the October 2007 top, the price/earnings multiple for the Dow was 17 and for the S&P it was 17.5. Today it is 14.1 for the Dow and 13.9 for the S&P assuming that earnings for the latter are going to be $111 this year. The bullish argument is that the market is still undervalued at this level and the bearish one is that investors do not have faith in earnings expansion, which is why the multiples are lower this time. One also has to take into account the record low levels of interest rates at the present time in calculating why the p/e multiples are lower now as well, because stocks do compete with bonds for investor participation.
There will actually be some interesting earnings this week for the start of the first-quarter reporting period for those companies whose fiscal quarter ended in February, and the list is as follows – tonight: NKE; Friday: TIF, DHI.
Economic reports for the week are finished.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, were flat for the third-quarter and were 6.2% higher in the fourth-quarter. The current projection is for a gain of 3.5% in the first-quarter of 2013.
The S&P trades at 13.9 times the projected 2013 earnings of $111. Earnings were $85 in 2010, $92 in 2011 and $102 in 2012. The estimate for 2013 is $111, a gain of 9%. The average P/E multiple for the S&P going back to 1954 has been 16.4.
After four consecutive quarters of negative G.D.P. growth, we have had 14 consecutive quarters of positive growth, starting with the third-quarter of 2009, every quarter in 2010, every quarter in 2011, and every quarter in 2012. G.D.P. rose by 2.2% in 2012, and is projected to increase by 2% next year, according to various surveys.

Donald M. Selkin

Don Selkin is the Chief Market Strategist at National Securities Corporation, member FINRA/SIPC, (NSC) and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analyses concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, Recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, Associated Press}.